Friday, October 3, 2008

The Commodity Correction

The commodity correction over the last few months has been brutal, across all market caps. For example, my micro cap holding Alloy Steel International1 (OTC BB: AYSI.OB) closed at $1.16 per share today, down from its June high of about $2.80; mid cap U.S. Steel (NYSE: X) closed at $63.50 today, down from its June high of nearly $192 per share; and large cap Arcelor Mittal (NYSE: MT) closed at $44.62 today, down from its June high of $104.25. Share prices of agricultural commodity companies have posted similar drops.

A question this raises is whether this is a cyclical correction in the continuing secular bull market in commodities, or the end of that secular bull market. My view is that this is a cyclical correction and could be a great buying opportunity (for anyone who has some dry powder left). It's worth revisiting some comments Jim Rogers made to Bloomberg's Carol Massar in July ("Jim Rogers Speaks"):

[Carol Massar:]...What about this commodity boom? I think recently we talked to you and or I was reading something and it said that we are in the fourth inning of a baseball game. Still there, in your view?

ROGERS: Probably around the fourth inning, that sounds good enough. Maybe the fourth and a half, maybe the top or the bottom of the fifth, something like that. The commodities bull market has a long way to go.

There are going to be corrections along the way, Carol, there always are, but no, nobody has discovered any major oil field in over 40 years. There just aren't any supplies of anything.

MASSAR: Jim, what do you make though of the arguments out there about demand destruction, about a weakening global economy and that is going to start to bring down commodities. I know you talk about some near-term corrections.

So, anything out there though that will substantially drag down commodities, in your view?

ROGERS: Well, recession, if the world goes into recession, of course it is going to drag down the demand. But remember, Carol, in the 1970s we had one of the worst decades in a long time for the economy. And oil went up ten times, the oil commodity, we had one of the great bull markets of all time in commodities because supply went down faster than demand and that is what is happening now too.

Oil can go down - you know the bull market in oil started in 1999. Three times since 1999, oil has gone down over 40 percent. It wasn't the end of the bull market. It just scared the socks off everybody, including me. That can happen again, but it is not the end of the bull market.

MASSAR: So, any pullbacks for a buying opportunity, in your view, whether it is oil, whether it is grains, whether it is base metals?

ROGERS: Yes, of course. Everything. Base metals have already corrected a lot. Wheat has corrected a lot. Sugar has corrected a lot. Get yourself some sugar, take it home, take it home from your Bloomberg.


MASSAR: 30 seconds left here. I know you mentioned you are kind of looking, eyeing at base metals. Anything else you think investors should be looking at, just kind of keeping on their radar, just quickly if you could?

ROGERS: Agriculture, agriculture. You should be buying agriculture. I am buying agriculture.

Update: Rogers reiterated his view that the secular bull market in commodities hasn't ended in an interview with New Delhi Television over the weekend, "Commodity bull run not over yet: Jim Rogers". Excerpt:

NDTV: Do you believe in the theory of commodity cycle cooling off?
Jim Rogers: There is no question that commodity prices have cooled off, but that is the way the market works. You always have consolidation and correction. Three times in the last nine years, oil prices have gone down by 50 per cent, and each time it was not the end of the bull market. If suddenly someone discovers huge oil reserves then the bull market is still on.

NDTV: But how long the bear market in the current commodity space will continue?
Jim Rogers: In the 1970s, gold went down 50 per cent, but after two years it turned around and went up 850 per cent. So I don’t know how long this correction is going to last. If the worldwide economic problem continues for a while then it can last for a longer period.

NDTV: But everybody is talking about global slowdown, so if there is no demand then how will commodity price rise?
Jim Rogers: They will have a consolidation but if you are suggesting the world in a perpetual economic decline, then we will never have any bull market.

1Alloy Steel occupies a different niche than traditional steel companies: it manufactures alloy steel wear plates for mining equipment.

1 comment:

DaveinHackensack said...

Just put in a limit order to buy a few more shares of Alloy Steel at 91 cents per share.